CHALLENGES FOR IMPLEMENTING THE TRADE FACILITATION AGREEMENT
CHALLENGES FOR IMPLEMENTINGTHE TRADE FACILITATION AGREEMENTInternational Trade and Economics SeriesMarch 2016
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International Trade and Economics SeriesCHALLENGES FOR IMPLEMENTING THE TRADEFACILITATION AGREEMENTAndras LAKATOS1ABSTRACTThe adoption of the WTO Agreement on Trade Facilitation in December 2013 was a historicmoment for the WTO, being the first multilateral agreement adopted since the conclusion of theUruguay Round. Nevertheless, its ratification process by national parliaments of WTO MemberStates is proving challenging, despite evidence proving the link between the adoption of tradefacilitation measures and the reduction of trade costs.The main challenges faced by WTO Member States are linked to cumbersome constitutionalrequirements of treaty ratification, the need to make changes in domestic legislation, thechallenges of providing detailed costing of TFA implementation to the government, the lack ofpolitical interest, the lack of private sector involvement in the preparation for ratification, and highcosts of implementation may be deterring factors for governments willing to engage in the TFA’sratification process.After two decades on the multilateral trade agenda and almost a decade of negotiations, theAgreement on Trade Facilitation (TFA) was finally concluded by Trade Ministers of World TradeOrganisation (WTO) Member States in December 2013. In November 2014, a Protocol ofAmendment was adopted to integrate the new agreement into Annex 1A of the WTO Agreement. 2In spite of the unequivocal evidence that the main beneficiaries of the TFA will be those countrieswhich undertake full compliance with all of its provisions, a significant number of developingcountries are still stalling in ratifying the agreement. They are struggling with the domesticchallenges of the ratification process, due to inadequate policy coordination or simply becausethe issue is not high on the agenda of their governments. Nevertheless, and despite the lack ofdeadline to accept the aforementioned Protocol of Amendment, all WTO members are bound tocomplete their domestic ratification processes and deposit their instruments of acceptance withthe Secretariat.In this short article, we provide an overview of the WTO TFA, whilst highlighting the mainimplementation challenges facing developing countries.DEFINING TRADE FACILITATION AND GLOBAL BENEFITS OF TRADE FACILITATIONREFORMSThere is no universally agreed definition of the term “trade facilitation” (TF). Various definitionshave been used by different international organisations and in different trade agreements.31Andras Lakatos is a Senior Economic Advisor at International Economics Ltd.See WTO – Trade Facilitation. Available at: https://www.wto.org/english/tratop e/tradfa e/tradfa e.htm3According to UNECA (2013), “A broad definition of trade facilitation encompasses policies to reduce trade transactioncosts, including “behind-the-border” policy reforms and the reduction of transaction costs resulting from cumbersomeadministrative customs, documentary requirements and border procedures that affect cross-border movement of goodsand services. The term also covers simplification of the logistics, documentation and customs procedures involved intransiting goods through ports and land borders. It refers, too, to “domestic” policies and institutional structures that create22
Challenges for implementing the Trade Facilitation AgreementA. LakatosAccording to Neufeld (2015), “[the] subject is typically framed by the scope of measures covered in therespective agreement. What some treaties label as “TF” can have little to do with how the matter isapproached in others.”4 In the WTO Doha negotiations, it was agreed that for the purposes of theAgreement on Trade Facilitation, the scope of TF would be limited to issues related to three Articlesof the General Agreement on Tariffs and Trade (GATT 1994): Articles V, VIII, and X, dealing,respectively with freedom of transit, fees and formalities connected with importation andexportation, and publication and administration of trade regulations.According to the European Commission5, “the cost of trade procedures may represent even as muchas 4-5% of the overall costs of trade transactions. This is about the same cost as the current tariff averageon trade in industrial goods of industrialised countries, which is 3.8%. Halving the costs would meansaving 325 billion USD [ ] a year – money currently being wasted – largely on the shoulders of SMEsand developing country traders.” This also seems to indicate that the benefits from larger TF reformswould result in better market access to developed countries, than a substantive multilateralagreement on non-agricultural tariff reductions. The OECD Trade Facilitation Indicators estimatethat comprehensive implementation of all measures covered by the WTO TFA would reduce totaltrade costs by 10% in advanced economics, and by 13–15.5% in developing countries.With respect to commitments made by WTO Members under the TFA, the WTO Secretariat 6 hasfound that full implementation would reduce global trade costs by an average of 14.3%, and thatAfrican countries and least-developed countries (LDCs) could expect to see the biggest averagereduction in their trade costs. The WTO also predicts, on the basis of computable generalequilibrium (CGE) simulations, that export gains from full implementation of the TFA would bebetween USD 750 billion and well over USD 1 trillion dollars per annum, depending on theimplementation time-frame and coverage, with developing countries capturing more than half ofthe available gains. However, on the basis of gravity model estimates, the gains would be evenlarger: between USD 1.1 trillion and USD 3.6 trillion.7The benefits of TF reforms do not only positively impact on trade flows (both exports and imports),but also on governments’ higher revenue collection (due to the increase in trade volume, andhigher detection rates of fraud) and attractiveness to foreign direct investment (FDI).8With respect to the ACP countries, TF was highlighted as an issue in all of the sector studies of PAs,conductedbyPricewaterhouseCoopers because the “losses that businesses suffer through delays at borders,complicated and unnecessary documentation requirements, and lack of automation of governmentmandated trade procedures, can exceed the costs of tariffs.”9 Besides the classical fields of TFmeasures, such as improving facilities at ports, airports and other border crossings, they alsoinvolve establishing efficient and modern customs regimes, and transparent and consistentan enabling environment for trade. Finally, it can take in harmonisation of national and regional standards withinternational standards.”4Neufeld, Nora (2014): Trade Facilitation Provisions in Regional Trade Agreements: Traits and Trends, Journal ofInternational Commerce, Economics and Policy Vol. 5, No. 2, p. 4.5European Commission: “Trade facilitation: interest for developing countries”, p. 1. Available at:http://ec.europa.eu/taxation customs/resources/documents/trade facilitation-interest for developing countries.pdf6WTO (2015): World Trade Report, Geneva7 The wide gaps between the high and low estimates result from the possible different implementation time-frames andalso reflect the fact that the TFA contains many “soft law” provisions that developing countries may or may not implement.8ECA (2013)9See PricewaterhouseCoopers, “Sustainability Impact Assessment of the EU-ACP Economic Partnership Agreements - keyfindings, recommendations and lessons learned”, Paris, PricewaterhouseCoopers, May 2007, 96 pages at page 75.3
International Trade and Economics Seriesregulations among trading partners. The SIA also emphasised that “in the ACP context, it [TF] alsoimplies the fight against informal taxation on the main trade roads in Africa,” something which isdefinitely not dealt with under the TFA.HOW DOES THE TFA OPERATE?The TFA provisions aim at expediting the movement, release and clearance of goods, includinggoods in transit. However, the TFA does not deal with the whole spectrum of what is generallyconsidered “trade facilitation,” as infrastructural and transport issues are left outside of theagreement. Actually, the scope of the TFA is limited to clarification and extension of tradefacilitation-related disciplines already provided for by one or more specific GATT articles, namelyGATT Article V (Freedom of Transit), Article VIII (Fees and Formalities connected with Importationand Exportation), and Article X (Publication and Administration of Trade Regulations). In addition,it also provides for effective cooperation between customs and other relevant authorities on tradefacilitation and customs compliance issues. Section I of the TFA contains the substantive disciplinesof the agreement, while Section II lays out the special and differential treatment (SDT) provisionsfor implementation by developing countries and LDCs. Section III of the TFA deals with institutionalarrangements, including the obligation of WTO Members to establish national trade facilitationbodies.The substantive provisions of the TFA are organised in twelve articles containing approximately 40“technical measures,” which are partly binding (“hard law”) obligations and partly best-endeavourtype commitments that set out good regulatory practices. 10 According to Hamanaka (2014), themajority of obligations set by the TFA are best-endeavour commitments, thus the scope of bindingobligations is very limited.11 In general the binding provisions are those which are directly linkedto the already existing TF-related GATT Articles mentioned above. Contrary to the “hard law”provisions of the TFA, the “soft law” provisions are hardly enforceable. 12For developing countries and LDCs, the most important part of the TFA is Section II, which containsSDT provisions that condition the implementation of the agreement on their capacity to do so. Inshort, developing countries are allowed to decide when their obligations will be implemented, andmake the implementation conditional on the provision of assistance by developed WTO MemberStates. To benefit from SDT they must identify each “hard law” provision of the TFA and bestendeavour commitment they wish to implement according to the three categories, and notifythem to the WTO: Category A provisions are those that a developing country member designatesfor implementation by the time the TFA enters into force; Category B contains provisionsdesignated for implementation after a transitional period; and Category C provisions are those forwhich the implementation will occur after a transitional period, and subject to the provision ofassistance and support for capacity building. In addition, the TFA also provides additionalflexibilities for implementation such as:13In fact, the TFA abounds in such best endeavour terms as “should”, “to the extent possible’, “as appropriate”, “as may berequired”, “whenever” or “wherever practicable”, and “where possible”.11See Hamanaka, Shintaro (2014): WTO Agreement on Trade Facilitation: Assessing the Level of Ambition and LikelyImpacts, Global Trade and Customs Journal, Volume 9, Issue 7 & 8.12Hoekman, Bernard (2014): The Bali Trade Facilitation Agreement and Rulemaking in the WTO: Milestone, Mistake orMirage?, EUI Working Paper RSCAS 2014/102, at pages 12-13.13WTO: Trade Facilitation Agreement: Factsheet on Special and Differential Treatment for Developing Countries, found athttps://www.wto.org/english/tratop e/tradfa e/tfa dev count brochure e.doc104
Challenges for implementing the Trade Facilitation AgreementA. Lakatos Early Warning Mechanism: Possibility to request an extension in case of difficulties inimplementing a provision in Category B or C. The extension will be automatic if theadditional time requested does not exceed 18 months; Expert Group: If a requested extension has not been granted and a member lacks thecapacity to implement, the TF Committee will establish an Expert Group to examine theissue and to make a recommendation; Shifting between Categories: A developing country member may shift provisions betweenCategories B and C; and Grace Period: Following entry into force of the TFA, developing country members will notbe subject to the Dispute Settlement Understanding for a period of 2 years for Category Aprovisions.IMPLEMENTATION CHALLENGESMany WTO Members, including 43 out of 61 ACP WTO Members, are still due to ratify this singlemost important multilateral agreement reached in the history of the WTO. Especially notable arethe missing ratifications by those countries that are likely to benefit the most from TF reforms,namely African LDCs and LLDCs, as well as Pacific Island countries. Three quarters of African ACPcountries – 30 out of 40, including South Africa, the best TF performer in the continent – and fivePacific ACP countries out of six did not manage to get assent to the TFA through their respectiveratification procedures in the one and a half years since the conclusion of the negotiations at theBali Ministerial Conference in December 2013.Whilst the reasons for such failure might vary from country to country, they generally includecumbersome constitutional requirements of treaty ratification (e.g. the PNG Constitution requiresthat the TFA be on the agenda of the Parliament for at least ten sitting days, which means that theratification process can take a year or more), the need to make changes in domestic legislationprior to ratification (e.g. in Nigeria and South Africa14), the challenges of providing detailed costingof TFA implementation to the government (e.g. in PNG), lack of political interest towardsratification, and last but not least the lack of, or inappropriate private sector involvement in thepreparation for ratification.High costs of implementation might be a deterring factor for governments willing to engage in theTFA’s ratification process. However, the predicted high costs of TFA implementation, which hadbeen referred to by many developing countries to justify their opposition to the agreement atearlier stages of the negotiations, proved to be exaggerated by studies conducted by internationalorganisations such as UNCTAD, the OECD and the World Bank. According to UNCTAD, theestimated total costs observed in 26 developing countries and LDCs to reach full implementationof the TFA range widely, from USD 136,000 to USD 15.4 million. The level of development appearsnot to influence decisively the total cost of TF reforms, but rather it is the level of ambition of thereforms (i.e. the scope and depth of the measures) that have the greatest impact on the final bill.While governments are legitimately interested in knowing how much the TFA would cost to thebudget, they should also bear in mind possible offsetting factors, such as private sectorcontribution in the form of mandatory user fees or PPP schemes for establishing and operatingInformation provided at the WTO’s Preparatory Committee on Trade Facilitation meeting of 24 March 2015,https://www.wto.org/english/news e/news15 e/fac 24mar15 e.htm145
International Trade and Economics Seriessingle windows, and of course the value of technical assistance for implementing Category Ccommitments. In PNG, for example, the National Trade Facilitation Committee recently estimatedthat the total cost of the activities to be undertaken over a period of five years to meet fullcompliance with the TFA, would amount approximately to USD 6.8 million, of which USD 1.4 millionwould accrue to the PNG government and the private sector, and USD 5.5 million which would bewholly, or partly financed by foreign donors. Finally, all analyses of data from actual TF projectsto assess TF implementation costs, excluding infrastructure-related investment measures (whichare not covered by the TFA), indicate that the benefit-cost ratio of TF is always positive and oftenhigh.15CONCLUSIONDespite the different studies highlighting the potential economic benefits of the TFA, and contraryto conventional wisdom, the TFA is unlikely to bring significant direct economic gains to WTOMembers. First, as briefly mentioned above, the TFA does not address investment in physicalinfrastructure (e.g. level of development and quality of ports, airports, roads, and railinfrastructure), from which most TF gains emanate. Second, most of the TFA provisions are nonenforceable optional measures, and although reflecting international best practices, it is left to thediscretion of WTO Members to decide how far they go with such “soft” trade policy reformmeasures. This feature of the TFA confirms that trade facilitation reform is basically a domesticunilateral issue. As Hamanaka (2014) rightly observed, “[the] fact that the TFA does not bringimmediate economic impacts does not mean it is not economically meaningful. The TFA can be a tool oftrade facilitation reform in the long-run and result in significant economic gains.”16ABBREVIATIONSACPAfrica, Caribbean and PacificPNGPapua New GuineaEPAEconomic Partnership AgreementPPPPublic Private PartnershipEUEuropean UnionSDTSpecial and Differential TreatmentFDIForeign Direct InvestmentSIASustainable Impact AssessmentSMESmall and Medium EnterprisesTrade FacilitationGATT General Agreement on Tariffs and TradeCGEComputable General EquilibriumTFLDCLeast Developed CountriesUNCTAD United Nations Conference on Trade and DevelopmentLLDCs Land-locked Developing CountriesUNECA United Nations Economic Commission for AfricaOECD Organisation for Economic Co-operationand DevelopmentUSDUnited States DollarWTOWorld Trade Organization15Hoekman (2014)See Hamanaka, Shintaro (2014): WTO Agreement on Trade Facilitation: Assessing the Level of Ambition and LikelyImpacts, Global Trade and Customs Journal, Volume 9, Issue 7 & 8, at page 349.166
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Challenges for implementing the Trade Facilitation Agreement A. Lakatos 3 According to Neufeld (2015), “[the] subject is typically framed by the scope of measures covered in the respective agreement. What some treaties label as “TF” can have little to do with how the matter is
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